The future of the K30 billion (about $120m) Reserve Bank of Malawi (RBM) treasury note issued last year hangs in balance as authorities have not conducted any further auctions for the past two months, Business News has established.
Since the RBM issued the debt security on December 23 2011 in order to restructure governmentâ€™s ballooning domestic debt and develop a benchmark yield curve, the response from the investors has been lukewarm.
In the fourth and last auction held on March 29 2012, only the two-year treasury note was subscribed raising K620 million (about $2.4m) at an average yield of 14.13 percent.
The total amount of funds raised in the last auctions stand at K11.5 billion (about $46m), representing a 38.7 percent subscription of the total amount.
Market analysts argued the lukewarm response was because investors were not willing to lock their funds in the longest ever bond in Malawiâ€™s history at a time when foreign currency shortages were critical, galloping inflation hit double digit with disposable income fast dwindling.
According to the RBM, the two and three year notes of K10 billion (about $40 m) each offer coupons (interest) of eight percent and 8.5 percent respectively, while coupon rates on the four and five year notes for K5 billion (about $20m) each are 9.5 percent and 10 percent.
Raising doubt on the future of the bond, Nico Asset Managers Limited in their economic review for May 2012 said: “It is unlikely that authorities will go ahead with issuing further treasury notes as with the higher interest rates will increase the cost of refinancing their long term debt.”
With the recent upward revision of the bank rate-the rate at which commercial banks borrow from the central bank-to 16 percent from 13 percent, yields on government Treasury Bills (TBs) have also gone up, raising exciting among investors on short-term investment, according to Nico Asset Managers.
RBM spokesperson Ralph Tseka on Tuesday said he was out of the office and could not competently comment on the future of the K30 billion treasury note.
Despite arguing that the appetite for the long-term debt security is low, chief executive officer of Alliance Capital Limited James Chikavu Nyirenda on Tuesday urged RBM to continue with the treasury note.
“This concept of weekly auction is not the best. It is very expensive, there are administration issues that are involved in processing and to put up the results,” he said.
Nyirenda said, in an ideal situation, the best way is to list the debt security on the Malawi Stock Exchange (MSE) as is the case in other countries to create flexibility where investors can go in and out with their funds as and when they wish.
Going forward, he said there is need to define the market expectation in terms of interest rate movement in the medium term to have a clearer picture of the level of yields.
According to the RBM, the auctions for the bonds were supposed to be held monthly until the bonds are fully subscribed.
The RBM earlier said the ne treasury notes would enable government to extend the maturity profile of its debt but its overall domestic debt stock was not expected to increase as a result.
Last year, the appetite for bonds was attractive with RBMâ€™s sale of K5 billion three-year bond in June 2011 oversubscribed at a yield of 15 percent. That time, the economy was more stable than today.